One-two punch for Michigan students: more loans, high interest rates

AND AFTER COLLEGE?: All the money being borrowed by college students in Michigan — $1.9 billion in one year alone — poses a significant threat to future economic growth says Mitch Bean of Great Lakes Economic Consulting. (courtesy photo/used under Creative Commons license)

The tab is even bigger than it sounds. A Bridge Magazine analysis of loan data reveals that the majority of that borrowed money is at high interest rates, rather than via the much-publicized subsidized loan rates that Congress just allowed to double. And interest on these loans starts on day one, rather than being deferred to a student’s graduation or departure from school.

More than $1.1 billion in federal loans made to students at Michigan’s public universities in the 2011-12 school year were at rates higher than the rates for most home and car loans. Those rates ranged from 5 percent for Perkins loans (offered to low-income students), to PLUS loans available to parents of undergrads at 7.9 percent.

Adding to the long-term cost was the fact that interest on $1 billion of those loans started to accumulate the day students and parents signed the paperwork – rather than being deferred while the borrowing student is in school.

All of this growing debt – ballooning to $27,451 for the average Michigan college grad in 2011 – is a financial ball and chain for young professionals. But it’s also a long-term economic problem for Michigan.

College grads making “house payment”-sized student loan payments buy used cars instead of new, delay buying homes and sometimes delay starting families, said Mitch Bean*, of Great Lakes Economic Consulting and a former director of the Michigan House Fiscal Agency.

“Clearly it’s a drag on the economy when people get out of college and can’t go on with their lives,” Bean said.

Loan sums grow at rapid clip

The reasons student loans in Michigan have grown 57 percent in five years are pretty simple:

Going up

The amount of student loans taken out at Michigan’s public universities jumped 57% from 2006-07 to 2011-12. Universities now derive more money from student loans than from state aid to higher education.

The debt accumulated by graduates at Michigan public and private universities averaged $27,451 in 2011, the 11th highest debt in the nation and an almost 7 percent increase over the debt load of 2010 grads. Among the state’s public universities, the average debt ranged from $21,649 for grads of the University of Michigan-Dearborn to $35,476 at Ferris State. (Lawrence Tech grads bore the highest debt burden among Michigan’s private schools, with average student loans of more than $46,000.)

The average debt of grads of Oakland University and Lake Superior State jumped more than $3,600 in one year; Michigan Tech grad debt rose $3,200.

Two public schools – the University of Michigan at Ann Arbor and the University of Michigan-Flint – had slight decreases in student debt.

Interest-rate boost heightens scrutiny

The student debt explosion is back in the news because Congress recently allowed the interest rate on Stafford subsidized loans to double. But most Michigan college students are already paying that doubled rate, or even more.

According to data available at Michigan Higher Education Institutional Data Index, just 38 percent of federal loans to students attending the state’s public universities were Stafford subsidized loans, with an interest rate of 3.4 percent, with no interest until the student leaves college. Another 45 percent were Stafford unsubsidized loans, with an interest rate of 6.8 percent that begins accruing from day one. Another 15 percent were parent PLUS loans, with an interest rate of 7.9 percent, or about double what many Michigan residents can get on home loans.

Even with higher debt and higher interest, a college degree is well worth the investment, said Mark Kantrowitz, founder of FinAid.org and a well-known adviser on college finances.

“Education boosts the local economy and creates jobs,” Kantrowitz said. “People with college degrees are healthier and they’re less likely to commit crimes. Someone with a bachelor’s degree pays twice as much in taxes as a person with a high school diploma,” so education helps support government services.

Others don’t even try to go to college because of the fear of debt, said Brandy Johnson, executive director of the Michigan College Access Network. “We know from our own survey data that affordability is the major barrier to access,” Johnson said. “This generation is debt-averse because of the economic crisis.

“Our message is, even at the high end (of college costs), when you do the long-term cost benefit analysis, it’s still worth it,” Johnson said. “You just need to be smart about the kind of debt you take out.”

Senior Writer Ron French joined Bridge in 2011 after having won more than 40 national and state journalism awards since he joined the Detroit News in 1995. French has a long track record of uncovering emerging issues and changing the public policy debate through his work. In 2006, he foretold the coming crisis in the auto industry in a special report detailing how worker health-care costs threatened to bankrupt General Motors.

Big D

Look, school costs keep going up because of the ridiculous competition between schools wherein they build and operate ever more expensive palaces of convenience and comfort to attract students. …and because of the powerful and greedy employee unions.

This article implies (or worse) that the solution to the loan problem is for the State to spend more on secondary education. That would just continue to exacerbate the problem.

It is incumbent on the students and their parents to be wise consumers and conserve their present and future resources. If enough people were fiscally sane, the universities and unions would be forced to be also. (Though they’d first spend a lot of time, effort and money in Lansing trying to get bailed out).

Joe

This article completely misses another key reason for an increase in student loans.

The bursting of the housing bubble, and subsequent dramatic drop in home values has made it difficult or impossible for families to utilize the good, old HOME EQUITY LOAN to help subsidize their education investment.

Previously, families would utilize Home Equity Loans and Lines of Credit to cover a portion of college costs. Most don’t have that ability, with home values dropping and sucking out all potential equity.

I would have also appreciated a deeper explanation of why college costs have increased so much this decade, while local governments and nearly all private businesses were able to survive with lowering their expenses.

College administrators and unions need a reality check. They are living a very easy life on the backs of taxpayers, families, and students.

David Waymire

The House Fiscal Agency examined the cost of delivering a college degree at public universities over the last decade. It found that the annual cost of providing a degree increased only slightly when adjusted for inflation, from $11,624 in 2001-02 to $11,860 in 2012-13. That’s $18/year over the rate of inflation during a period when universities greatly enhanced their research operations, internship programs, placement operations and entrepreneurship programs.

So why is tuition up? That same study showed state support per student has decreased from $6,698 in 2001-02 to $3,583 (in 2012 dollars) last year — a $3,115 cut. To make up the difference, tuition has gone from $4,945 to $8,277 — a $3,332 increase. It’s the failure of the state to support its students that is the primary reason for higher tuition.

CollegeSavvy

I understand your viewpoint on the keeping the costs of higher education down, especially given the outlandish new building projects at Universities in Michigan which shall not be named. However, the problem with it is that middle-to-low income students bear the brunt of the student loans. The students from families that can afford to help their child pay for their education are coming out with minimal debt, while the students from middle-income families are graduating with upwards of $25K while still working two or three jobs and trying to graduate as quickly as possible. While $25K is still quite a manageble debt amount, it’s problematic when a huge sector of our generation is dealing with this debt, esp. at 21-25 years old, and very little information is provided to student regarding repayment. When student loan interest begins to rise, it can spiral out of control, and the loan repayment could potentially be a never-ending one.

There also needs to be better and more resources available to students to help them realize that this debt repayment is manageable. When I graduated from a State University, a “repayment” packet was basically shoved in my hand without even so much as a pat on your back, but a “don’t let the door hit you on the way out” in terms of helping me learn about loan repayment options! And I asked for help! Financial aid offices are happy to take your money, regardless of the source, but their exit counseling services are sub-par, I would wager to say — across the board. Certainly, this is something that Student Financial Aid offices need to be working on.

Charles Richards

Messrs. French and Bean are equally foolish. Mr. French says, “All of this growing debt – ballooning to $27,451 for the average Michigan college grad in 2011 – is a financial ball and chain for young professionals. But it’s also a long-term economic problem for Michigan.” As if the taxes required to subsidize college education wouldn’t be.

And Mr. Bean says, “College grads making “house payment”-sized student loan payments buy used cars instead of new, delay buying homes and sometimes delay starting families, said Mitch Bean*, of Great Lakes Economic Consulting and a former director of the Michigan House Fiscal Agency.

“Clearly it’s a drag on the economy when people get out of college and can’t go on with their lives,” Bean said. Yes, obviously what people spend on one thing, they cannot spend on other things. So, what’s new?

I, too, have a problem with this analysis and the author’s conclusions.

With greater pressure for a college degree, more students are enrolling (and graduating) – a desirable economic influence. With higher enrollment, of course the loan rate will increase. According to the National Center for Education Statistics, the state of Michigan’s fall enrollment is ~65,000 students more PER YEAR than in 2005. So add each f those years up, as students take more loans, and it matters. And odds are good, the increased enrollment is for those who have more of a stretch financially to be there.

So a ~$85k yields a 30 year return of $875k. That’s a 13.1% annualized ROI. Any broker would tell you that with that kind of 30 year return, take it and run. So even with graduating with ~$25k in debt (less than most new cars) the return is WELL worth it.

Of course we should be concerned with rising educational costs, but this is supply and demand at work – and it’s STILL paying off for these educational investors (aka students).

Duane

It is an interesting article that raises more questions than it answers.

Is the student debt a choice or a requirement? Are there students able to find equivalent educations at State supported schools at a lower cost? Are there means and methods for students to reduce their need for loans? Are there degrees that are available with the potential for a larger return (reducing the overall burden) of loans? Are there things the students can do to lower their need for loans and reliance on others for financing their advanced educations? Is it a choice of students or are they being forced into these loans by the schools?

If we rely on Bridge reporting we must assume that all students not having wealthy families are forced into these loans. I wonder if there are any ‘poor’ or ‘middle class’ students that have found a way to avoid such loans or at least lower their loans significantly below the average costs. If there are such successes I would imagine that there would be many students and families that would like to hear about them so they might learn and apply those practices. Ah, but we are talking about Bridge reporting and Mr. French.

Hardvar

How about an analysis of debt by major? I would really be interested in the value of loans taken out to finance obscure majors that have little chance for employment vs loans funding degrees in professional studies. It would also be useful to reference the degrees to projected position needs in the near future.

D

What is really troubling is the trend of those who are chronically unemployed and out of benefits to see college loans as a means of income, often with full knowledge they are expected to pay the money back but with no intention of actually doing so. These may be traditional college students but more often are older individuals who for various reasons have no income, but can qualify for student loans to pay living expenses and are able to find lenders who are making loans without regard to the students’ ability to be successful in college or the student’s interest in actually completing the courses for which they enroll. Desperation means these individuals care little about the damage they will cause to their future credit–without income now, they see no future at all.